Global economy, not Iran, now dominates oil prices; crude falls three per cent

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An oil pipeline and tank storage facility is shown in Hardisty, Alta., June 20, 2007. THE CANADIAN PRESS/Larry MacDougal

NEW YORK, N.Y. - Iran's ability to rattle oil markets has been greatly diminished by growing concerns about the world economy.

The price of oil fell this week even though Iran staged missile tests and renewed threats to block key oil shipments out of the Persian Gulf. Benchmark U.S. crude dropped by US$2.77, or 3.2 per cent, Friday to end the week at $84.45 per barrel in New York.

Iran sparked a big price increase earlier this year as it sparred with the West over its nuclear program. When Iran held military exercises in the Gulf at the beginning of the year, oil prices climbed more than four per cent. Fears about a prolonged conflict — and what that would do to world oil supplies — eventually drove benchmark oil to near $110 per barrel in February. The jump helped push U.S. gasoline prices close to $4 per gallon.

Five months later the U.S. and Europe are still concerned about Iran building a nuclear weapon and have numerous economic sanctions in place to pressure the oil-rich country to limit its nuclear program. Iran still refuses to comply.

The difference, experts say, is that investors are now focusing on growing evidence that the global economy is slowing. The U.S. isn't creating enough jobs to lower its 8.2 per cent unemployment rate. Europe has struggled to handle a festering banking crisis and some countries are slipping into recession. Manufacturing activity has stalled almost everywhere.

"Iran is still trash talking, but what's even more frightening is the bigger picture," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "The economy just hasn't looked good. There's a sense that this malaise will march on."

And Barclays analyst Helima Croft said the rhetoric out of Iran this week may simply be an attempt to boost the price of its oil. "For now, this looks like a rather hollow threat," Croft said.

Traders read more troubling economic headlines on Friday. The U.S. Labour Department said employers added just 80,000 jobs in June — a disappointing number that shows the economy is still sluggish three years after the recession ended. Meanwhile, borrowing rates for Spain and Italy rose to distressing levels because investors think more needs to be done to resolve Europe's debt crisis.

The U.S. is the world economy slows, less oil is consumed and prices tend to fall.

Brent crude, which helps set the price of imported crude used to make gasoline, fell by $2.51, or 2.5 per cent, to end the day at $98.19 per barrel in London.

Natural gas futures fell after the government said the country's supply grew last week. Natural gas in storage hit an all-time high at the end of last year and has stayed well above average so far this year. The surplus is shrinking, however, as utilities burn more natural gas to generate power. And power demand will grow this summer as homes and businesses crank up their air conditioners with record heat gripping much of the nation.

The price of natural gas fell 17 cents to finish at $2.78 per 1,000 cubic feet in New York. In other futures trading, heating oil fell by six cents to end at $2.71 per gallon, and gasoline futures gave up five cents to finish at $2.72 per gallon.

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